Despite RBA's dovish rate cut, easing likely to remain on a gradual path
Summary
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In a widely expected move, the Reserve Bank of Australia (RBA) delivered a 25 bps rate cut at this week's monetary policy announcement, the second rate cut this year, bringing its Cash Rate to 3.85%. While the move itself was expected, the accompanying policy statement and press conference took on a notably more dovish tone than market participants had anticipated.
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In explaining the reasons for the rate cut, the RBA expressed more confidence in inflation's sustainable return to the 2%-3% target range, and put forth a moderately softer growth outlook and an expectation for a moderation in the labor market through year-end. In its updated economic projections, the central bank lowered several of its GDP growth and headline and underlying inflation forecasts.
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While the announcement was clearly dovish in tone, and consistent with further RBA rate cuts, for now we are maintaining our view for monetary easing to continue at a gradual pace. Policymakers expressed a degree of caution and data-dependency, and even the updated inflation projections suggested limited risk of inflation undershooting the 2%-3% target range. We also believe reduced tariff tensions could offer support to China's and, ultimately, Australia's economy.
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For these reasons, while we believe the slowdown in underlying inflation and modest domestic growth will lead to further easing, we also expect rate cuts to continue at a gradual once-per-quarter pace. We look for 25 bps rate reductions at the August and November meetings of this year, which would see the policy rate reach a low 3.35%.
Author
Wells Fargo Research Team
Wells Fargo
